The need isn't for the consumer. It's advantageous for the central bankers. With it they can more easily control demurrage/inflation/deflation/confiscation (like the Chinese government plans to do with the e-RMB).
IE taxes based on savings instead of income.
Even if every bank account in the country started charging an account fee to cover negative interest rates, people would continue to use banks because they are just so damn convenient.
It's really only the wealthy who would be faced with this being any significant amount of money, and those people comprise a tiny minority of bank accounts.
What I don't understand is the consequences of that on private banks.
Maybe, maybe not - it's possible for interest rates to be high and inflation to be even higher (stagflation).
This is a pretty fundamental misunderstanding of modern economics.
It is a tax on savings whether currency is "supposed" to be saved or not. All retail banks offer savings accounts specifically for this purpose.
I think tax is the wrong word because a tax implies a kind of tithe on top of desirable behavior. A fine implies that you are being penalized for undesirable behavior. I think the latter is a more apt description.
Your mattress full of hundos is detrimental to the economy and you are being fined for maintaining it.
Savings accounts are not an example of unproductive capital because they collateralize loans. That's why they're not subject to the inflationary haircut. They're not particularly productive hence the low return, which may be below inflation. However, that's an ROI below benchmark, not inflation. i.e. savings accounts are just a bad investment. Bad investments will exist in any market conditions.
Personally I maintain a small cash buffer in a savings account and I pay the (small) delta between inflation and interest rate as a fee for liquidity.
When central banks issue cash now are they literally sending billions of dollars to the mint, trucking it off to a bank, and then the bank records it on a digital ledger? Seems wasteful.
It is, but it's restricted. M0 is central bank money [1]. Currently, only financial institutions have it. If the public could open accounts at the BoE, they too could own M0.
CBDCs are a way to give the public M0 without putting the central bank into the retail banking business. That gives central banks powerful new levers. For example, cash limits how negative rates can go. If cash were to become scarce and most money were held as M0, the central bank could enforce negative interest rates by clawing back M0.
Negative rates are feasible today. But were they to go sharply negative, they'd hit bank capital. Having the public directly hold M0 removes that side effect.
Bank deposits are insured up to £85k, which means they are as solid and as good as cash.
It’s well known that negative rates only bind on commercial bank deposits - if at all.
Negative rates are just a tax on banks - which they recover by charging more for loans, and paying less for deposits like any other costs.
No, it doesn’t. Cash with depreciation or expiration (both preannounced and ad hoc) has been used before. Politics, not technology, limits the use of that tool, and CBDC doesn’t meaningfully change the politics.
Yes, if you changed the cash we're talking about, pounds sterling, it would be different.
> CBDC doesn’t meaningfully change the politics
Remember a few years ago, when IT would talk about getting long-needed projects greenly because they slapped "blockchain" on the proposal?Expiring cash is toxic. CBDC is not. Branding matters.
Also, wouldn't this widespread use require in-kind withdrawal of cash from circulation to have any real effect?
Btw I don't think OP argued citizens wouldn't need an account.
>> For example, cash limits how negative rates can go. If cash were to become scarce and most money were held as M0, the central bank could enforce negative interest rates by clawing back M0.
This would only really be effective if CBDC became prevalent enough to actually make a dent in money supply. What proportion of money would have to be CBDC for this to actually have an impact, and would we get there by just pure issuance of CBDC or by taking cash out of circulation and replacing it with CBDC?
> Btw I don't think OP argued citizens wouldn't need an account.
>> CBDCs are a way to give the public M0 without putting the central bank into the retail banking business.
I don't know how you would avoid retail banking unless you were to issue it via a means other than an account.
There's a lot more that goes into retail banking than just having an account. Of course citizens would need an account, how else will they be tracked :) I think the OP meant that the central bank could give customers an account for the sole purpose of holding their digital "crypto" coins and sending/receiving money with it....without having to do provide all the other services that go with retail banking like loans, credit cards etc.
If they are in control of digital currency then they have a ledger of transactions, maybe? and if you have a 1:1 record of every single ledger then it's a bit harder to obfuscate?
Banks & businesses keep ledgers like these, but you have to 1. get your hands on it and 2. in case of multiple sets of books, you need to find the correct one. And then you have to connect all the dots.
Chinese capital and lending controls are very strict but this hasn't stopped Chinese and others to try and move money out of China. China has had repeated issues with things happening beyond regulators' reach until they become too big to hide and then have to be unwound, like excessive use of shadow banks for lending.
Going fully cashless will make negative rates impossible to avoid. UBI can be more specifically targeted as well.
Generally speaking, the money supply exceeds the total amount of cash in most countries.
Settle everything instantly, no charges, no withdrawal fees converting between cash and digital. The cost of running the system are probably minimal compared to what the entire consumer-banking sector collects.